The International Fisher Effect has proven to have substantial power at predicting short-run changes in spot exchange rates.

Question

Quizplus · Accepted Answer

The International Fisher Effect, also known as the uncovered interest rate parity, states that the difference in interest rates between two countries should equal the expected change in exchange rates over a certain period. However, empirical evidence suggests that the International Fisher Effect does not necessarily hold in the short-run and is therefore not a reliable predictor of short-term changes in spot exchange rates.

The International Fisher Effect Has Proven to Have Substantial Power